It's been a tumultuous year for oil and gas producer LINN Energy (LINEQ). LINN's investors have suffered through an informal inquiry from the Securities and Exchange Commission regarding some of its accounting practices, which threw a critical planned acquisition into doubt. At long last, investors are about to see a great deal of clarity on the pending acquisition of Berry Petroleum (NYSE: BRY). Each side of the table will meet on Monday to hold a vote on the deal.
Should the deal go through, it will represent a major tailwind for LINN. If not, the market will undoubtedly be disappointed, but it's worth noting LINN had a great year without Berry. Nevertheless, Monday represents a critical day for LINN and Berry Petroleum.
A strong 2013, an even more promising 2014
LINN Energy has performed very well this year from an underlying business perspective, as it's clearly capitalized on the oil and gas boom in the United States. LINN increased average production and sales of oil, natural gas, and natural gas liquids in the third quarter. LINN easily covered its hefty distribution too, generating $2 million in excess cash above its distribution.
Put simply, LINN did what it does best in 2013: making strategic acquisitions to grow production and profits. It acquired significant assets that will continue to fuel production growth next year. For example, this year LINN bought oil and natural gas properties in the Permian Basin for $525 million. The assets in the region include more than 300 proven low-risk drilling opportunities, with proved reserves of approximately 30 million barrels of oil equivalent. Going back further, LINN's track record of making accretive acquisitions is impressive. LINN has acquired more than $11 billion in production opportunities since 2010, and has made 60 separate transactions worth $15 billion since 2003.
In all, LINN expects production growth of 8% to 10% in 2013. In addition, LINN shouldn't have any trouble covering its distribution in the fourth quarter. LINN expects to generate at least 5% excess cash above its planned fourth-quarter distribution.
Importantly, LINN's fourth-quarter outlook does not include any benefits from the proposed merger with Berry, which are expected to be considerable next year and beyond. Berry's portfolio of assets fulfills several of LINN's strategic priorities going forward. First, Berry solves LINN's desire to boost its liquids exposure, which is a high-growth corner of the oil and gas market. Moreover, LINN's overall production will grow by 30%.
Furthermore, Berry holds high-quality assets that are long-lived that will experience low rates of decline. The reserve life of these assets is estimated to be greater than 18 years. In addition, Berry's currently strong footprint in the Permian Basin will greatly complement LINN's already-considerable operations there. This means the combined entity will reap significant synergies from the deal, which will reduce costs and therefore enhance profitability.
LINN plans to offer 1.68 shares of its financial holding entity LinnCo (NASDAQ: LNCO) for each share of Berry, for a total deal value pegged at $4.9 billion. At long last, investors should have a resolution on the Berry acquisition soon.
All eyes on Monday's meeting
The shareholder and unitholder meetings will be held on Monday, December 16, and subject to approval, the deal is expected to close immediately after. LINN stands to fulfill several of its key strategic initiatives if the deal closes. At the same time, it's not as if LINN will collapse should the deal fall through. LINN performed well this year, even without the benefits of Berry's assets. Should the deal progress as planned, though, it represents a huge catalyst for LINN and LinnCo. Investors will likely see immediate benefits, as LINN and LinnCo have long planned to increase their distributions by 6% if it merges with Berry.
That's why investors should closely monitor Monday's events, and take their cues from what management has to say regarding the proposed merger with Berry Petroleum.
